Shares of two of the leading Web-hosting services dropped sharply Friday, as investors speculated about their futures.

NaviSite

(NAVI) - Get Report

was the

Nasdaq's

second-biggest percentage loser Friday, after its rating was cut for the second time in as many days. The stock dropped $1.88, or 26.8%, to $5.13 after a downgrade by

Prudential Volpe

from strong buy to accumulate. A similar downgrade from buy to accumulate was issued by

Merrill Lynch

Thursday, NaviSite faces strong exposure from the dot-com shakeout under way, as well as the uncertain cash position of majority owner

CMGI

( CMGI).

Web-hoster

Digex

(DIGX)

also dropped on the day that

WorldCom

( WCOM) received approval from the

Justice Department

to take over it and parent

Intermedia

(ICIX)

. Digex also held its annual analysts' day and was unable to impart a convincing vision of the future. It closed down $5.13, or 15.6%, to $29.

Digex raised fourth-quarter guidance on earnings, but analysts had hoped for even more visibility on earnings in the coming year and information about how Digex would integrate with WorldCom's

UUNet

division, which offers businesses Internet access.

Overshadowing both companies' futures is the continuing dropout of dot-coms; both companies provide Internet backbone connections and server storage for Web sites. As the Web shakeout started in late spring, the stocks of the hosting companies started to fall with it. NaviSite's share price has dropped more than 97% from its high in early March -- Digex's has dropped more than 80%.

"When it dawned on people there was some exposure, the stocks traded down heavily. When the numbers came out in June and showed that there was exposure, there was heavy impact," said analyst Steven Murphy with

CIBC World Markets

, which has done underwriting for Digex.

Since then, the hosters have scrambled to diversify their client lists. About 60% of NaviSite's client base is vulnerable dot-coms, analysts noted. Digex claims that 70% of its client base is business customers. The number for industry leader

Exodus

( EXDS) is roughly 50%.

Cash remains an ongoing problem for NaviSite, although not for Digex, which has a promise of funding from WorldCom. As analysts noted before, a sale of NaviSite remains an attractive opportunity for CMGI to make some ready money.

4:51 p.m.: Nortel Inventory Speculations Take the Gleam From Other Optical Stocks

While analysts debated the health of

Nortel

( NT) with swords drawn, some of the networking giants slid down with it Friday.

This morning

Banc of America Securities

analyst Chris Crespi asserted that some of Nortel's biggest customers had stockpiled Nortel's optical equipment in the third quarter, causing it to miss revenue expectations in 2000. The fallout from his remarks was affecting not just Nortel's stock, but other optical components makers as well. (

TheStreet.com

wrote a separate story about these

inventory questions.)

Crespi's remarks about Nortel's business slowdown, and the possibility that it may have lost business from

Qwest

(Q)

to competitor

Ciena

(CIEN) - Get Report

, apparently prompted a countering research note. The note was penned by

Merrill Lynch

analyst Thomas Astle, who repeated his buy rating on the stock and characterized the talk, which first surfaced Thursday, as speculation.

Nortel also responded, saying that it had neither lost customers to Ciena nor laid off employees.

Even so, optical component maker

Corvis

(CORV) - Get Report

continued to feel the fallout from the talk. Corvis closed down $5.69 or 14.6% to $33.31.

Also sliding steeply were two fiber-optics component makers.

Newport

(NEWP)

ended down $8.75, or 11.6%, to $69.56 and

Avanex

declined $5.38, or 6.8%, to $75.19.

Chipmaker

Applied Micro Circuits

(AMCC)

closed down $5.56, or 9.1%, to $55.69. Applied had also lost 13% of its value the day before, after a note from Merrill Lynch about inventory oversupply in the type of communications chips it manufactures.

Two quarters ago Nortel accounted for 40% of Applied's revenue, Sandy Harrison, analyst at

Pacific Growth Equities

said. But for the past three quarters the company has made a point of diversifying its client base. For this reason, speculating that its Nortel exposure is the only cause of the decline in Applied's share price may not be entirely on point, he noted as a caveat.

A note by analyst Joe Valenzuela of

Fechtor Detwiler

may have put more pressure on optical component makers' stocks. Valenzuela wrote that low-cost manufacturers from Asia were moving into the opticals market offering cheaper components as a way of gaining market share.

After dropping more than 6% Thursday during the height of the speculation, optical leader

JDS Uniphase

(JDSU)

was trading slightly higher today, closing up $1.63, or 2.4%, to $70.13.